Analyze the impacts of an export subsidy imposed by a large country

Note: These examples are hypothetical scenarios used for teaching purposes and do not necessarily reflect real trade negotiations or scenarios.

1. Analyze the impacts of an export subsidy imposed by a large country exporter.

a. Assume the U.S. is a large exporter of dairy products to China. If the U.S. places a 10 percent export subsidy on dairy products shipped to China, what happens to the quantity of dairy exported from the U.S. to China?

b. Using the 3 panel diagram of the world market, illustrate the effects on prices and quantities when the U.S. places an export subsidy on dairy products shipped to China. Be sure to label all critical points, curves, and axes.

c. Now focusing only on the U.S. as the large exporting country, draw one graph showing the change in national welfare as a result of the export subsidy (changes in consumer surplus, producer surplus, terms of trade, quota rents, government revenue, government payments). Clearly describe what happens in the U.S. dairy market in terms of overall national welfare as a result of the export subsidy.

2. Analyze the impacts of an export subsidy imposed by a small country exporter.

a. Assume Chile is a small country exporter of blueberries to the U.S. Suppose Chile places an export subsidy on blueberries shipped to the U.S. Why might the Chile impose this type of barrier to trade?

b. What are the net welfare effects on the Chilean market for blueberries resulting from the export subsidy? Draw a graph illustrating the changes in national welfare (consumer surplus, producer surplus, terms of trade, quota rents, government revenue, government payments). Clearly describe what happens in the Chilean market in terms of overall national welfare as a result of the export subsidy.